The economy is recovering, but with fiscal cuts looming and unemploymentstubbornly high, the rate of growth will be fairly tepid byhistorical standards.In light of positive structural economic reforms undertaken by thegovernment, coupled with flexible monetary and exchange ratepolicies, we remain bullish on the long-term economic prospectsfor the UK relative to the eurozone over the longer term.Despite numerous ructions between the ruling Conservatives andLiberal Democrats, we expect the coalition government to hold firmthrough to the next parliamentary election in 2015.

Major Forecast Changes

We have revised up our 2013 real GDP estimate to 1.5% from 1.1%and have upped our 2014 forecast to 1.8% from 1.4% previously.

Key Risks To Outlook

Downside Risks To Medium-Term Growth: There are significantdownside risks to our economic growth forecasts, particularlystemming from the impact of fiscal consolidation and the eurozonesovereign debt crisis.

Upside Risks To Inflation: Should the pound remain broadly weakand global commodity prices edge higher, we would warn of upsiderisks to our inflation forecasts. Although there is little scope for asubstantial and sustained surge in inflation, we believe that thereare risks of inflation remaining stubbornly above target.Executive Summary 5Core Views 5Major Forecast Changes 5Key Risks To Outlook 5Chapter 1: Political Outlook 7SWOT Analysis 7BMI Political Risk Ratings 7Domestic Politics 8Party Conference Season Kick-Starts Race For 2015 8The UK party conference season is a chance for the main parties to start spelling out the policies that will determine campaignstrategies ahead of the 2015 general election The ruling Conservatives have stuck with a pragmatic approach by focusing attention onthe recovery and stability of the public finances The opposition Labour party appears to be going down a more populist route by tacklingthe so-called 'cost of living crisis' Although the latter will go down well with cash strapped voters, we still hold our out-of-consensus callfor the Tories to pick up the most seats in 2015 Long-Term Political Outlook 10The Road To 2015 10Despite just two years elapsing since the last parliamentary election, the UK's main political parties are already gearing up for thenext ballot in 2015 For the ruling Conservatives the election will hinge on the state of the economy and success of its proposed fiscalreforms Meanwhile, for the beleaguered opposition Labour party, a credible alternative to the government's core economic strategy isneeded, in addition to reviving its image, which has been tainted by the fractious Brown-Blair era Table: Political Overview 11Chapter 2:Economic Outlook 15SWOT Analysis 15BMI Economic Risk Ratings 15Economic Activity 16Spontaneous Growth Surge Forces Up GDP Forecasts 16If the latest leading indicator data are anything to go by, the UK economy could be close to hitting escape velocity, following manyquarters to sluggish growth Such has been the rapidity of the turnaround that we have revised up our 2013 growth forecast and we areconfident that 2014 will similarly beat our previous expectations We stress, however, that there are several weak points in the economyand red flags which could yet undermine the resurgence in economic momentum TABLE: ECONOMIC ACTIVITY 16Monetary Policy 18Getting To Grips With The Carney Conundrum 18Having arrived at the Bank of England to much media fanfare, Governor Mark Carney's first major policy move - forward guidance - hasbeen widely criticised Although the idea of pledging to keep interest rates low has been well received, the execution has been let downby knock-out clauses which have undermined the credibility of the bank's commitment to easy policy For the time being we stick to ourcurrent core forecast for policy rates, with the first 25 basis point hike pencilled in for end-2016, and await third quarter GDP data to geta better sense of whether the recent rebound in economic activity can be sustained heading into 2014 Table: MONETARY POLICY 18Economic Activity II 20Mind The Gap: The Struggle To Assess Spare Capacity 20Assessing the amount of spare capacity in the UK economy since the financial crisis has been a thorn in the side of policymakersand analysts alike We have long argued that the gap is probably not as large as many believe, which would go some way to explainconsistently above target inflation and may mean a sooner than expected normalisation in mone tary policy Exchange Rate Policy 22Sterling Strength Could Ultimately Prove A Red Herring 22The British pound has rallied sharply in recent months as a slew of positive macro data have bolstered market sentiment If momentumin the economy picks up, there would be limited prospect of the Bank of England making good on its forward guidance promise to keeppolicy rates low However, for the time being we remain somewhat cautious given that it is not readily clear what has been driving thesurprise rebound in economic activity since mid-year TABLE: EXCHANGE RATE 22TABLE: Currency Forecast 23 September 2013 23Banking Sector 24Banking Sector: Still A Weak Point In The Recovery 24The UK banking sector continues to shed assets and has failed to ramp up credit supply to the private sector Even as the economyrecovers, the banks will be under pressure to rein in bloated balance sheets On the back of data for the first eight months of the year,we have revised down our growth forecast for 2013 and 2014 The UK Economy To 2022 25UK Will Outperform Eurozone Over The Long Term 25Despite the current economic stagnation in the UK, we hold to a more upbeat assessment over the longer term and expect growth tooutperform the eurozone Supportive of this view is the relatively competitive nature of the UK economy, independent monetary andexchange rate policies as well as a major fiscal reforms However, we warn that a number of challenges remain, such as an ageingworkforce as well as low educational and training attainment in the poorest areas Chapter 3: 10-Year Forecast 25TABLE: Long-Term Macroeconomic Forecasts 25Chapter 4:Business Environment 27SWOT Analysis 27BMI Business Environment Risk Ratings 27Business Environment Outlook 28Institutions 28TABLE: BMI BUSINES AND OPERATION RISK RATINGS 28Infrastructure 29TABLE: BMI LEGAL FRAMEWORK RATING 29TABLE: LABOUR FORCE QUALITY 30TABLE: TRADE AND INVESTMENT RATINGS 31Market Orientation 32TABLE: ANUAL FDI INFLOWS 32Operational Risk 33Table: Top Export destinations (US$mn) 33Infrastructure 35Chapter 5: Key Sectors 35TABLE: Construction And Infrastructure Industry Data, 2011-2016 36TABLE: Construction And Infrastructure Industry Data, 2011-2016 37Oil & Gas 39TABLE: Oil Production, Consumption And Net Exports, 2011-2016 41TABLE: Oil Production, Consumption And Net Exports, 2017-2022 42Other Key Sectors 43TABLE: Pharma Sector Key Indicators 43TABLE: Telecoms Sector Key Indicators 43TABLE: Defence and Security Sector Key Indicators 43TABLE: Autos Sector Key Indicators 44TABLE: Food and Drink Sector Key Indicators 44Table: Freight Sector Key Indicators 44Chapter 6: BMI Global Assumptions 45Increasing Confidence In Growth 45Table: Global Assumptions 45Table: Developed States, Real GDP GrowtH, % 46Table: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, % 46Table: Emerging Markets, Real GDP Growth, % 46